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US Consumer Inflation Rising as Commodities Lose Some Steam

Higher commodities prices may show up in a possibly hotter consumer inflation report Friday, even as commodities lose steam.

Commodities traders at the New York Mercantile Exchange.
Photo: Oliver Quillia for CNBC.com
Commodities traders at the New York Mercantile Exchange.

Thursday's markets seesawed, with stocks and commodities selling off early, then reversing as the euro moved higher. The euro erased losses after European Central Bank policy maker Luc Coene said the rate hike in April was not a one-off move.

U.S. wholesale prices, reported Thursday, rose 0.8 percent in April, as fuel costs rose sharply. Producer prices rose an unadjusted 6.8 percent in the past year, the largest 12 month increase since September 2008. CPI is expected to rise 0.4 percent, and 0.2 percent, when excluding food and energy. On a year-over-year basis, headline consumer prices are expected to rise 3.1 percent.

"I think, unlike has been the case recently, that even an above-expectations CPI print will be able to be explained away given the pull back in commodities prices," said Ian Lyngen, senior Treasury strategist at CRT Capital.

CPI is reported at 8:30 a.m. and consumer sentiment is expected at 9:55 a.m.

"Commodities are driving the bus and what's driving commodites are the headlines from Europe." -Director, UBS Floor Operations, Art Cashin

"My suspicion is CPI might be a little bit higher," said Boris Schlossberg of GFT Forex. Ultimately, higher inflation readings would support the dollar.

"..If it begins to generate rhetoric from the FOMC officials that stresses concerns over inflation more than concerns over growth. The key tell will be if the dollar/yen lifts off this 80 barrier and starts to rally. That will show you the market is building in rising rate expectations for the second half of the year," he said.

Dollar/yen was at 80.98 in the early evening New York time, and the euro was at 1.4246, well off its lows. Trading in commodities was volatile, with silver dropping 8 percent before finishing the day down 2.8 percent at $34.08 per ounce.

Oil rebounded to $99 per barrel in a volatile session, but gasoline continued to decline, losing 5.89 cents per gallon to $3.0639. The focus is expected to shift back to the issue of supply as the flooding Mississippi River could threaten refineries.

"I think a lot of people have been whipsawed around the commodities story and think this is fundamental story predicated on China, when what you're really looking at as much as anything is positioning," said Barry Knapp, chief equities portfolio strategist at Barclays. "Policy in China and emerging markets in general is tightening. Growth is leveling off toward midcycle sustainable levels but it is not falling substantially."

"Clearly this morning the Chinese told you what the real story was by raising the reserve requirement for banks. No, things aren't slowing. Inflation risks are still high," said Knapp.

Schlossberg, however, does believe the commodities story is being driven by slowing growth concerns. "The risk trade is sold for the time being. Any bounce here should be sold. We're no longer seeing the positive economic background that nurtures the risk trade going forward. It is a kind of a self-healing cycle ... if we maintain relatively steady pace of labor demand and we have lower commodities prices going through the summer that could repair some of the damage."

Knapp said the data in April has not shown as much improvement as he expected and stocks could be choppy. "I do think the primary trend is higher but to go significantly higher we need convincing data on the labor market," he said.

The Dow ended Thursday up 66 points at 12,695 and the S&P was up 6 at 1348.

"The euro reversed. It took commodities first and then dragging and screaming, stocks went behind them," said Art Cashin, director of floor operations at UBS.

"Commodities are driving the bus and what's driving commodities are the headlines from Europe," particularly regarding the Greek debt crisis.

"Are the Greeks going to go back in the street? That's gotten back to center stage," he said.

Questions? Comments? Email us at marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.